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Employing family members

As long as it can be justified commercially, you can employ family members in your business. 

They can be remunerated with a salary, and possibly also with benefits such as a company car or medical insurance. You can also make payments into a registered pension scheme.

Family employees are taxed in just the same way as regular staff - through PAYE.  If you do employ a family member you should ensure that he/she is paid in accordance with National Minimum/Living Wage regulations. A physical payment should also be made into the family member’s bank account.  

Children can also work part time from the age of 13, as long as it is “light work” and does not endanger their health and safety or interfere with their education. They can work full time from the age of 16, but must continue to participate in education or training until the age of 18. Local authorities often have their own rules, so if you are considering involving your children in your business it is worth checking what the rules are in your area.

Any salary your sole trader/partnership/company pays is deductible as an expense, which means potentially your own personal tax liability or company’s corporation tax bill is reduced. What HMRC is very much interested in, on the other hand, is what your business/company gets out of the arrangement. HMRC look to ensure  that any family member you employ is only being paid a wage appropriate to the job they are being employed to do; equal pay for equal value. 

There must be no special treatment paid to your family member through an inflated salary, reduced working hours, or anything else that falls outside of the “equal pay for equal value” ideal.

Family members may also be taken into partnership, thereby gaining more flexibility in profit allocation. Taking your non-minor children into partnership and gradually reducing your own involvement as their contribution increases can be a very tax-efficient way of passing on the family business. Of course, you should be aware that this could put your whole family wealth at risk, if the business were to fail.

As mentioned above, HMRC may challenge excessive remuneration packages, income shifting or profit shares for family members, so seek our advice first. 

If you are in need of further advice about putting family members on the payroll, or other small business tax tips then please contact Desirie Lea or Bill Benoy on 0151 348 8400 or email payroll@moco.co.uk